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Tax Hikes on the Rich Won't Work

House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Harry Reid (D-NV) have made it clear that they will strive to raise taxes on all families making over $250,000 annually on January 1st. According to Nancy Pelosi, “I see no justification for giving a tax break…for the wealthiest people in America…the tax cuts at the high end have increased the deficit enormously.”

To the contrary, the key culprit behind rising federal deficits is runaway government spending that has plagued Washington. The current federal $1.4 trillion budget deficit was not created because government taxed too little. As a result of the Bush-era tax cuts which lowered tax rates for all Americans, total tax revenue increased by 40 percent within four years. Between 2002 and 2004, tax payments by individuals who made more than $200,000 increased by 19.4 percent—more than double those taxpayers in lower brackets.

In the current tax debate, we cannot ignore human action and motivation. President Obama claims that raising tax rates for wealthy Americans will increase tax revenue by $700 billion. Obama's prediction is improbable since the rich tend to be highly responsive to changes in their tax burdens.

While the vast majority of Americans make less than $250,000 annually, raising taxes on the wealthy will have disastrous effects on the entire economy. Ultimately, hiking taxes for the rich will likely worsen the deficit while destroying countless jobs. As history has repeatedly proven, higher tax rates produces lower tax revenue.

Simply, soak-the-rich policies have never worked in anyone’s favor. For instance, Maryland Governor Martin O’Malley raised income tax levels on wealthy households to 6.25 percent from 4.75 percent in 2008. Lawmakers in Annapolis wrongly predicted that this millionaire tax would generate $106 million. According to the Wall Street Journal,

Well, the state comptroller's office now has final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

Certainly, Maryland’s millionaire tax back fired. It is estimated that Maryland lost $1 billion because one-third of wealthy residents moved or filed their taxes in other states with lower tax burdens. Since Maryland’s millionaire tax was implemented, Maryland’s deficit has increased from $1.7 billion to $2 billion.

Similarly, New York enacted a “millionaire tax” that raised tax rates on all residents making more than $200,000 a year. However, since New York implemented their so-called millionaire tax its state revenue has declined by 9 percent. According to New York Governor David Paterson,

We increased the income tax for millionaires last year. We projected that we would get $4 billion and we actually got well short of it. Tax the rich, tax the rich. We've done that. We've probably lost jobs and driven people out of the state.

Raising federal taxes on the rich will also have similar unintended consequences—successful US companies will be more inclined to move to a country with a lower tax burden. The rich are better able to change the location, compensation or timing of their income in response to changing government tax policies. Wealthy Americans can generally afford to hire expensive lawyers or accountants to avoid paying numerous taxes. While the capital gains tax is expected to rise by 33 percent, billionaire Bill Gates and Warren Buffett hold most of their wealth in the form of nontaxed and unrealized capital gains. In various ways, the rich are the most responsive to shifting tax rates.

Under the Obama administration's plan, the federal top two income tax brackets will rise to 36 and 39.6 percent. As President Obama once said, “I do think at a certain point you’ve made enough money.” If the federal government confiscates nearly 40 cents out of every dollar made, businesses are discouraged from expanding their operation and would be entrepreneurs are deterred from starting new enterprises.

Instead, Congress must lower taxes for all Americans across the board to lower the deficit and boost job creation. President Kennedy favored “an across-the-board, top-to-bottom cut in personal in corporate income taxes.” In the eight years that Kennedy’s tax cuts were in effect, tax revenue actually doubled. Hiking taxes on the rich is simply a lose-lose situation by stifling economic growth while increasing the budget deficit.

With Congress set to convene to tackle sequestration and the fiscal cliff, the talk has once again centered around federal budget cuts and their potential effects. Tax hikes are back on the table, according to a few prominent Republicans this weekend. A large number of difficult military cuts looms. But few are thinking about the other layers of public spending that will be affected. State budgets will see massive effects from a potent mix of direct spending cuts and revenue reductions based, ironically, on the expiration of the Bush Tax Cuts.

As I have previously pointed out, if you can successfully divorce the cool persona from the words he speaks, President Obama plainly and often tells us exactly what he thinks, believes and intends. And when you listen to or read the words he says, it becomes abundantly clear that he is dedicated to a big government solution for every problem - whether real or imaginary.

Barack Obama has yet again taken credit away from individual success and attributed it to the government, sending small business owners one simple message: “If you’ve got a business, you didn’t build that. Somebody else made that happen.” If this doesn’t further prove that Obama is unfit to lead a country based on the splendor of a free market system, then I’m at a loss as to what will.

Obama seems to have one goal in mind this election: creating an even greater gap between Republicans and Democrats. I must admit, he’s doing a great job of it, stoking class warfare and feeding the media and his supporters left-wing lies. Did you hear the GOP is nothing but a bunch of wealthy and corrupt people that have no interest in the good of the lower and middle class citizens?

"Collecting more taxes than is absolutely necessary is legalized robbery." —President Calvin CoolidgeAt FreedomWorks, we have a saying that goes, “Lower Taxes + Less Government = More Freedom”. It’s a fairly simple, yet effective formula with an end in mind that virtually all Americans would agree is desirable. So why is it so difficult to accomplish in the modern political world? The answer boils down in part to the difference between how the federal government treats tax cuts and spending hikes.

Dear Senator,FreedomWorks is a leading grassroots organization with over a million members fighting for lower taxes, less government, and more freedom. I am writing today to offer our support for the general framework for the compromise tax proposal announced by President Obama and leaders in Congress. It is not our ideal proposal, but it is worth supporting while concurrently pushing for a major overhaul of the entire tax code and major spending reductions.

Cato Institute Scholar Dan Mitchell has a new video explaining that it is easy to balance the budget without raising taxes on anyone. In his video, he explains that we must rein in excess government spending. According to Mitchell,